Posts Tagged Delaware
Alaska, Delaware, Nevada, South Dakota Remain Top Trust States
Posted by Scott Martin in News on February 5, 2011
Tennessee and Rhode Island make our favorites list, but Hawaii just doesn’t get the recipe right. New rules predicted for new South Dakota trust firms.
The battle to woo trust business heated up last year as trust advisors and estate planners rushed to take advantage of the 2010 tax environment — and lawmakers scrambled to make their states look as attractive as possible.
Our 2011 ranking of the top trust states corrects a few oversights from last year, updates for new developments and addresses a few controversies.
Tennessee and Rhode Island make the list this year, at Tier 2 and Tier 3, respectively. Idaho and Wisconsin, which offer out-of-state trusts little real benefit beyond dynastic trust arrangements, drop off.
Checking all the boxes…or else
To make a serious bid for a share of the $1 trillion personal trust market, you really need to provide dynastic trusts, directed trusts and asset protection trusts, plus favorable tax treatment for non-residents.
“Fail to check a box as you go through the list, and that state might automatically get crossed off,” says South Dakota trust attorney Daniel Donohue, a partner in Davenport Evans Hurtwitz & Smith.
“You might not need to use a type of trust now, but family members are always active and doing things, so you might want to make use of those statutes down the road,” he added.
This is especially important in dynastic scenarios where advisors have to reckon with family members who haven’t even been born yet, but may eventually need a way to shield a trust’s assets from creditors decades from now.
In fact, despite Florida’s efforts to allow asset protection trusts this year, its failure to do so was one reason that kept it from joining the Big Four — Alaska, Delaware, Nevada and South Dakota — which offer just about everything on the menu.
As it is, Florida does allow directed trusts, which let outside advisors manage the underlying assets, as well as a substantial 360-year dynastic trust period.
“Florida is a good example of a state that doesn’t belong near the top but doesn’t belong at the bottom either,” explains Steve Oshins, Las Vegas estate attorney and author of Nevada’s 365-year dynastic trust statutes. “Their dynasty trust provisions are okay.”
Delaware has taken care to keep its trust code current while building on its own reputation as a high-net-worth mecca where assets can remain in trust not just for centuries, but forever.
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The Best States for Trusts |
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|
Tier |
State |
State Income Tax |
Directed Trust Statute |
Asset Protection Trust |
Dynasty Trust Ability |
Number of Trust Cos. |
Time Zone (from NY) |
|
1 |
No |
Yes |
Yes |
1000 yrs. |
5 |
(-) 4 |
|
|
1 |
Residents |
Yes |
Yes |
Perpetual |
53* |
(-) 0 |
|
|
1 |
No |
Yes |
Yes |
365 yrs. |
18 |
(-) 3 |
|
|
1 |
No |
Yes |
Yes |
Perpetual |
58 |
(-) 1 / 2 |
|
|
2 |
No |
Yes |
No |
360 yrs. |
29 |
(-) 0 |
|
|
2 |
Residents |
Yes |
Yes |
Perpetual |
25 |
(-) 0 |
|
|
2 |
Residents |
Yes |
Yes |
360 yrs. |
22 |
(-) 1 |
|
|
2 |
No |
Yes |
Yes |
1000 yrs. |
11 |
(-) 2 |
|
|
3 |
Yes |
Yes |
Uncertain |
1000 yrs. |
11 |
(-) 2 |
|
|
3 |
Residents |
No |
No |
Perpetual |
20 |
(-) 0 |
|
|
3 |
Yes |
No |
Yes |
Perpetual |
6 |
(-) 0 |
|
|
3 |
Yes |
No |
Yes |
1000 yrs. |
7 |
(-) 2 |
|
|
All tiers listed in alphabetical order. States links to state trust statutes. |
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Data: February 2011. © 2011 TheTrustAdvisor.com |
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South Dakota is too good to be true
And South Dakota has definitely established its credentials for no-nonsense service on directed trusts in particular.
However, South Dakota’s long ride with a $200,000 capital requirement may come to rest this year as more state trust regulators continue to complain that their entry rules are too easy.
States like Nevada, New Hampshire, Pennsylvania, Delaware, Florida and others all require $1 million or more to qualify for a trust license.
Recently, a South Dakota trust firm was prevented from doing business in Pennsylvania unless it posted $2 million in capital.
For several years, banking authorities in Florida have been annoyed with South Dakota trust firms operating there without meeting their $2 million capital requirements to do business.
Last year, the Florida banking department denied a new South Dakota trust company local operating privileges because its capital was too low. Experts say more of that is to come.
With 58 trust firms now based in South Dakota and operating in all 50 states and abroad, the South Dakota regulator will likely feel the heat and tighten up to prevent more regulator complaints and bad publicity.
Is it a matter of asset protection or nothing?
However, the ability to provide a high level of asset protection may emerge as the most important factor in how the various more-or-less trust-friendly states differentiate themselves in 2011.
“I believe more and more emphasis is being put on asset protection,” Oshins says.
“If so, that helps break away Nevada from the other top-tier states, given that it has the leading self-settled asset protection trust laws,” he added.
Last year, uncertainty about the future of the tax code drove a lot of middle-market families to move their money into trusts.
But since the eleventh-hour Congressional compromise raised the exemption to $5 million — well above the level where it could apply to any but the wealthiest Americans — the trust industry’s priorities are rotating.
The logic here is fairly simple. While raising the estate tax exemption from $1 million to $5 million lets all but 3,500 families a year off the estate tax hook, the number of affluent doctors, entrepreneurs and potential divorcees out there who could benefit from asset protection trusts remains fairly constant.
Asset protection may become a more important factor in next year’s rankings, but that may not help Hawaii make it onto the list.
The Aloha State tried to make a big splash in the industry by allowing asset protection trusts last summer. But the statute was so diluted by restrictions and added fees that it just didn’t impress many onshore family offices.
Shortly after we published our 2010 survey, we reported that New Mexico was moving closer to enacting more trust friendly rules to attract trust business. That may not be the case. Shortly before press time this week, we learned that one of New Mexico’s largest trust firms was jumping ship and filed for a South Dakota trust charter this week.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the reporting and research.
Permalink: http://thetrustadvisor.com/news/states2011
Wilmington Trust’s Sale to M&T Bank Beginning to Show Signs of Defections
Posted by Scott Martin in News on November 6, 2010
When $178 billion in trust assets are sold for $351 million a greater price down the road may be paid. Analysts say the legendary trust bank’s forced merger may benefit rivals and independent trust firms as Wilmington HNW clients, fiduciary officers and wealth managers may now be in play.
When Wilmington Trust agreed to a $351 million merger with Buffalo’s M & T Bank last week, bankers and analysts like Andy Stapp applauded M & T for getting a bargain.
But in the trust industry, there was a lot more muttering about just how low the deal valued Wilmington’s $178 billion in fiduciary assets — a full $30 billion of it actively managed — or why the bank’s lucrative fee business didn’t earn a premium.
For its $351 million, M & T basically bought a little over a year of Wilmington’s fiduciary income and got the trust bank’s $8 billion in deposits and $8 billion loan portfolio for free.
That’s a pretty alarming discount to the old rule of thumb that trust companies should sell for about 2% of their managed assets, but Wall Street analysts we talked to say Wilmington was a special case.
“It was just a distressed deal that won’t have any impact on valuations elsewhere in the industry,” says Andy Stapp, who covered Wilmington for Los Angeles investment bank B. Riley & Co.
“Wilmington’s corporate client services business is still doing very well,” he adds. “If they had stuck to their knitting and hadn’t been so aggressive in lending, they would never have needed to sell at any price.”
As far as Stapp is concerned, Wilmington management was “asleep at the wheel” when it came to lending to real estate developers in Virginia and its native Delaware.
In all, M & T due diligence estimates that a staggering 17% of all the loans on Wilmington’s books have either defaulted since the 2008 credit crisis or will do so in the foreseeable future. That vaporizes $1.5 billion in paper assets right there.
Wilmington had tried to raise added reserves to weather the slump, but it now looks like last quarter was the turning point. On Monday, the bank had to confess that it bled another $4 a share, with no relief in sight. Then it revealed that it was selling out to M & T.
Analysts we talked to note the timing of the merger announcement — at the exact same time Wilmington’s latest earnings statement hit the market — is no coincidence.
“At that point, it was clear they had to sell,” Stapp says. “It was their sixth quarter of losses and those losses were building a big capital hole. The stock was going down anyway.”
The FDIC might have forced their hand.
“We believe Wilmington had a gun to its head held by the regulators,” says Gerard Cassidy, bank analyst at RBC Capital Markets. “They were told to do something this dramatic or else.”
Wilmington clients are in play
M & T currently recognizes that even Wilmington’s name embodies the reputation of Delaware as a center of the buttoned-down traditional trust industry.
At the moment, there aren’t any plans to retire the Wilmington brand or integrate its high-end wealth management services into M & T’s more retail-oriented business.
To the apparent relief of Delaware governor Jack Markell, there also aren’t any plans to move Wilmington’s core offices to M & T’s Buffalo headquarters or give up its prestigious Delaware trust charter.
“Wilmington in the trust business has a very good reputation,” says Tom Alonso of Macquarie Equity Research. “In that market, not as many people know the M & T brand, so the goal here may be to keep the high-reputation brand and push high-net-worth business to it.”
Gerard Cassidy at RBC Capital Markets agrees. “It’s a great name with a great heritage — started by the DuPont family as it was. M & T doesn’t have that kind of cachet or history.”
In fact, Cassidy says he wouldn’t be surprised to see at least a few of Wilmington’s clients abandon ship unless the new owners act fast to reassure them that the merger won’t affect the service they receive.
This may be an opportunity for everyone from white-glove competitors like Bessemer Trust to start-up independent trust companies to get aggressive about courting Wilmington accounts. Any dilution of the old DuPont legacy will at least get rich families thinking about change, and that’s a potential win for the companies who convince them to move their money.
M & T is clearly thinking about this, so the window may close fast. In the conference call announcing the merger, M & T chief financial officer Rene Jones made an unusual direct appeal to “customers of the corporate client service business” to stick around.
Clients “should value the fact that M & T, like Wilmington Trust, is not part of a global investment bank and will continue in a unique position as the leading independent service provider,” he said.
Before the deal, Wilmington was ranked 16th-biggest U.S. trust company and M & T Trust Co. was pretty far down the list at No. 25, right behind Marshall & Ilsley, Charles Schwab Bank and the U.S. unit of Japan’s Mizuho Bank.
Factoring in a little attrition, the merged operation will leap up the list to No. 12 with around $270 billion in fiduciary assets, effectively becoming the king of the traditional trust banks.
Only Northern Trust, the custodians (BNY Mellon, State Street, Fidelity) and those global investment banks will have a bigger footprint in the trust business.
And those banks may be calling around the Wilmington offices to recruit disaffected talent even as we speak, says Tom Alonso.
“I think Northern Trust, everyone has lined up lists of people to call,” he tells me. “I’m sure the phones are ringing.”
Permalink: http://thetrustadvisor.com/news/wilmington
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and reporting.
Can a Delaware Dynasty Trust Help Retain Your Client for Generations?
Posted by Jerry Cooper in Sales and Marketing on September 4, 2009
Interview with Daniel F. Lindley, President Northern Trust of Delaware on the Basics
Several weeks ago I received a disturbing phone call. It was from my distant cousin Russell who I hadn’t heard from in over two years. Russell began the conversation with some small talk, but then got right to the point. He needed a loan of $500. I said, “What!” “Russell, when your father died less than two years ago, he left you an inheritance of over $2 million, mostly cash. What happened?”
In about five minutes I had heard an astonishing story. Russell had told me that he lost his entire inheritance. I immediately had an idea of what happened. You see, I knew Russell to be a foolish gambler and was known for making poor business decisions. Putting a $2 million bank account under his control, in my opinion, was dangerous.
He told me that he felt that he could run the money up to $8 or $9 million in Las Vegas, but after six short months, most of the money was gone. To make matters worse, he took the rest of the money and placed it on a concentration bet on some high-tech bulletin board company that went into bankruptcy about 6 months after his investment.
Russell’s story of a squandered inheritance is not unique. It was his story, and that fact that most American milionaires have failed to prepare even the most basic estate plans motivated me to write this article.
Earlier this week I spoke to one of the nation’s leading trust experts, Daniel F. Lindley, President of Northern Trust of Delaware.
We talked for close to an hour about Delaware dynasty trusts, their powerful benefits, and the amazing flexibility they offer for parents to provide a safe transition and transfer of wealth from their generation to future generations. Dan offers a strong case why Delaware is one of the best states in the country to host a dynasty trust.
TRUST BASICS
Lindley explained that in 1995 Delaware repealed the rule against perpetuities. Without it trusts can exist only as long as the grantor is alive. The rule against perpetuities abolishes this requirement and permits the trust to remain in force forever.
Lindley added that a Delaware dynasty trust offered compelling benefits:
- Tax Benefits. Assets contributed to the trust can continue for successive generation of the grantor’s descendants without incurring any additional gift tax, estate tax or generation-skipping transfer tax.
- Control Benefits. After the parents or grantor passes away, the trust may be administered to provide for care for the assets for the heirs and the heirs descendants.
- Doubles and as an Asset Protection Trust. If structured properly, the dynasty trust can be arranged to first provide asset protection benefits for the grantor and second conversion to a dynasty trust upon the passing away of the grantor.
- Administrative Trustee. A dynasty trust may also be arranged to serve as an administrative trust, thus permitting the trustee to direct the trust assets to to an outside money manager or wealth advisor.
A dynasty trust is an irrevocable trust that is defective for income tax purposes. Therefore, once money and property are contributed to a dynasty trust it’s one-way. To change the trust you have to go through a protracted procedure in order to get it out. Once it’s created it’s permanent and cannot be changed without either going to court or gaining the consent of all the adult beneficiaries or both.
ECONOMIC BENEFITS
A client’s ability to contribute assets to a trust that will continue for generation after generation without the imposition of any transfer tax is a compelling benefit.
The trust makes sense when you compare the benefits the trust offers to the alternative of passing assets outright, from generation to generation, subject to federal estate tax. The following chart, provided by Northern Trust Company illustrates that a $1 million contribution to a trust, a 5% after-tax rate of return on the investment assets, a new generation, subject to federal estate tax of 45% applied at each generational transfer, the dynastry trust would have an approximate value of $39 million after only 75 years.
The same $1 million held outside of the trust, subject to gift and estate tax occurring at each successive generation would have an approximate value of only $6.5 million. With the passage of each generation, the difference in value between the dynasty trust and the no-trust alternative becomes exponentially larger.
CONTROL FROM THE GRAVE
Had Russell’s father created a dynasty trust with some basics of Lindley’s suggestions that are explained further, Russell would probably still have most of his inheritance in place.
Lindley explained that trusts can be as simple or as complicated, controlling or generous, as the parent’s (grantor’s) desire. The grantor can install provisions in the trust instrument to change the level of distributions or even suspend distributions. Inducements can be created to provide for rewards or punishment that may influence the behavior of the beneficiaries.
Discretion may also be given to the trustee to make decisions about behavior. The trustee in essence becomes an institutional parent administering responsibility, education, and enforcement of the activities and wishes of the deceased parents.
On the positive side, this can include rewards for good behavior, for children graduating college or completing a certain degree; and can encourage heirs or children to go out and make a good living by providing a matching distribution.
For example, if the inheritor makes a half a million dollars in an enterprise, the trust could match that by giving the inheritor an additional distribution of a half a million dollars from the trust corpus, given of course the funds are there and available. The trust could even reward inheritors or children for having other children to continue the dynasty. These are powerful financial incentives that can reward positive behavior and can ensure the long lasting of one’s family.
On the negative side, onerous trust provisions can be included to discourage self-destructive behaviors. Examples include: substance abuse, compulsive gambling, leading unproductive lives, and being a spoiled trust fund baby lying on the beach and doing nothing but clubbing and womanizing. This can also include creditor problems and provisions may allow the trustee to keep track of a beneficiary’s FICA score to determine that they are not misbehaving by borrowing too much. Another important feature that could be included would punish the providing of false or misleading information to a trustee to gain advantage.
Based on his experience, Lindley said all of these examples and more have been used in the past and set a good template for possible dynasty trust wording to discuss with your estate planning attorney.
SUMMARY
What is a dynasty trust?
A dynasty trust is an irrevocable trust that has two important key features to it. First, it permits the transfer of wealth from one generation to the next generation without paying federal estate tax as one generation ends and the other begins. Second, a dynasty trust provides for a means of control over the disposition of money to the children and heirs to ensure the safety, protection and long lasting of the funds.
Who should set one up?
Any parent that has $1 million or more to leave to one or more children.
Why set up a Dynasty Trust?
To ensure that the trust assets are not needlessly taxed and that the funds that are gifted to the heirs are not lost or squandered.
When should parents set one up?
Hopefully before the parents die but preferably as soon as possible as contributions to the trust can be made at any time.
Where is the best place to locate the trust?
Delaware. Although other states exist that have repealed the rule against perpetuity and those include South Dakota, Nevada, Alaska, Wisconsin, Idaho, Illinois, Maryland, Virginia and Rhode Island.
How does one go about setting one up?
There are three key components that need to be dealt with in setting up a trust.
1. An advisor. Someone preferably from the wealth management organization needs to motivate the client of the necessity for the trust. This should not be a one-time presentation. It should be ongoing and once the trust is started the involvement should be part of the relationship manager’s duties.
2. An estate attorney to draft the trust instrument. This does not have to be an attorney in Delaware. It can be anywhere although a Delaware attorney should review the trust for legal conformity.
3. A. Trustee. Because it is an irrevocable trust either an attorney or an institutional trustee must be appointed to serve as trustee. It’s preferred that an institutional trustee be appointed since decisions may need to be made after the death of the grantor and for many generations. A trust company will not pass away, but an attorney can.
TIPS ON MAKING THE CLIENT PRESENTATION
As a wealth manager speaking to your clients it’s important not to become mired down with detail. Although clients have an appreciation for the fact that you may know your material and be able to get into the weeds and discuss trusts at a technical level, the bottom line is they may not care – but they want to be sure you know the technical part.
Because they trust you as their advisor they feel comfortable looking to you as a confidant and family mentor. You should offer them guidance on what they should do to be certain that their children and their children’s children will be safe and have enough money to live fruitful lives. This of course, includes money for college education, housing, food, subsistence, and a lifestyle in the same manner or better than they are now living or better.
It is best to start the client conversation with the concept that you may be offering a product. You can start with this question: “Are you familiar with the benefits of a dynasty trust.”
Telling a client that you offer trust services or offer trust advice gives the client nothing concrete, but telling the client that you could arrange the set up a trust or a dynasty trust rings in your client’s mind as concrete. It creates curiosity and bewilderment, enough emotions to open the learning process so that they are receptive to what you have to say.
The marketing message should be plain and simple. As Dan and Chip Heath say in their book Made to Stick, it’s best to dumb-down the presentation, add colorful metaphors, and lots of examples like my cousin Russell’s story to get your message through.
RETAIN CLIENTS FOR GENERATIONS
As mentioned, a dynasty trust be also be an administrative trust. This permits the trustee to appoint an investment advisor to manage the funds. This is one of the services of Northern Trust of Delaware. This appointment can ensure that your wealth management organization will be on-board for generations to come.
As starting point, my staff is preparing a complimentary Power Point presentation available to you in a coming edition of the Trust Advisor. If you would like some additional support or suggestions on how to begin now, please feel free to email at at thertrustadvisor@gmail.com
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